Eminent portfolio manager Damon Ficklin says that the key to long-term success is to build a concentrated portfolio of blue-chip growth stocks in which investors have a high degree of conviction.
Ficklin says in order to amass spectacular returns investors also have to hang on to those stocks for a long time, in search of compounded growth.
“We have a unique investment philosophy and process, which is built upon independent fundamental research. We are not concerned with what anyone else thinks of the companies we own,” he said in an interview to a financial website.
Damon Ficklin is a portfolio manager and analyst at Polen Capital. Ficklin joined Polen Capital in 2003 and is a co-portfolio manager and research analyst on the firm’s flagship Focus Growth Strategy. Prior to joining Polen Capital, Ficklin spent one year working as an equity analyst with Morningstar and four years as a tax consultant to Fortune 500 companies with Price Waterhouse.
Ficklin graduated from the University of South Florida with a BS in accounting. He did his MSA from Appalachian State University and earned an MBA from The University of Chicago Booth School of Business.
Ideal way to invest
Ficklin says the best way to invest is to construct a portfolio of the highest-quality businesses that can deliver sustainable, above-average earnings growth over the long term.
According to Ficklin, such exceptional companies not only have the potential to contribute spectacular returns, but are also naturally less risky, as their greater earnings stability and financial strength offer a margin of safety that typically results in less volatility during turbulent market environments.
Ficklin says free cash flow, low levels of debt and true organic revenue growth are some of the few requirements that can lead to high returns with downside protection.
Over his 17 years at Polen Capital, Ficklin has developed five key rules for selecting businesses for high quality growth portfolios.
Ficklin refers to these rules as the five ‘investment guardrails’, which when applied to all the eligible businesses in the world leaves a concentrated portfolio of 25-30 holdings.
“This concentrated approach is a big advantage in our ability to produce excess returns. It also allows us to reduce risk by concentrating in only the best companies and nothing less,” he says.
1. Look for companies with return on equity of 20 per cent or greater
Ficklin says investors should look for companies which have the ability to generate a return on equity of 20 per cent or greater on an underlying economic basis.
2. Invest in firms with better than average earnings and FCF growth
Ficklin says investors should look for companies with better than average earnings and free cash flow growth.
“We’re talking high single-digit, low double-digit earnings growth over the long term. We would want our companies to grow much faster than that but that’s the minimum threshold,” he said.
3. Spot businesses with improving margins
Ficklin says investors need to spot companies with typically strong and improving margins.
4. Pick companies having low debt
Ficklin says the companies that investors are looking to invest in should be having low levels of debt as investing in companies with high levels of leverage can spell trouble for investors in the long run.
“We’re not big fans of leverage and we’re looking for strong balance sheets,” he said.
5. Invest in firms displaying organic revenue growth
Ficklin says investors need to pick companies displaying true organic revenue growth for amassing spectacular long term returns.
“When you’re investing for the five plus year horizon and seeking steady durable double-digit earnings growth over time, we really believe you need to have some underlying revenue growth that’s persistent,” he says.
How guardrails help to shortlist firms for investment
Ficklin outlines that any one of those five guardrails remove a lot of companies from the investment universe and subsequently reduces a lot of risk.
“When you’re looking for all five, it sets an incredibly high bar. That takes a big global universe down to a manageable number very quickly. The guardrails get you down to a few hundred companies. Then we get down to our coverage universe which is less than 150 companies in the world. These are the true candidates for the global strategy,” he says.
Ficklin says excluding companies that are truly cyclical, lacking competitive advantage or are highly economically sensitive reduces the number before the guardrails even come into consideration.
“We’re left with a universe that’s quantitatively and qualitatively got great growth companies. Most of which are secular growth companies,” he says.
Ficklin says once the companies are shortlisted for investment using the five guardrails then they are not removed from the portfolio despite geopolitical and macroeconomic events, rather the weightings are adjusted to reflect the global situation.
“It’s not as if we’re constructing the portfolio for any supposed scenario over the next 12 to 24 months. We’re building it for the next five years and expect to own them through tough times,” he says.
Primary driver of investment returns
Ficklin says the primary driver of any fund’s returns is earnings-per-share growth and strong revenue growth.
He says it is important that each company which investors have picked for investment should have a big competitive advantage in a large growth market which allows the revenue to grow without competition and for margins to expand, leading to strong earnings growth.
He says there is good reason to believe that growth companies would continue to perform well despite having significantly outperformed over the past many years because it’s earnings growth that drives returns.
“If you look at any index over a period of time, the vast majority of the returns come from earnings growth, and then of course dividends,” he says.
Never time the market and keep a concentrated portfolio
Ficklin says investors should avoid making market predictions and shouldn’t try to time the market.
Ficklin says having a concentrated portfolio can be of a big advantage to investors as taking meaningful positions allows the winners to really contribute and by concentrating in only the highest quality businesses investors can limit drawdowns.
“We’ve witnessed some big drawdowns over the years, and we can see very clearly the power of a concentrated, high quality portfolio,” he said.
Characteristics of a great portfolio
Ficklin says investors should have a high-conviction portfolio that is typically invested in 25 to 35 of what they believe are the best businesses in the world.
He says the portfolio should consist of businesses that have sustainable competitive advantages and should deliver above-average earnings and free cash flow growth on a sustained basis.
According to Ficklin, investors should aim for a portfolio that can generate mid-teens earnings per share growth in the long term.
Ficklin says protecting capital during challenging periods is an important part of compounding capital over time.
“If you have significant losses, you need even more significant gains to recover, so capturing less of the downside can be just as important as picking winners,” he says.
Ficklin says concentrating only on the highest quality companies, can allow investors to do well in picking winning stocks and also mitigating risk.
He says investors can build a portfolio which can capture less of the downside by using variety of tactics like-
1. Investors can own a concentrated portfolio of only the best growth companies to consistently deliver strong earnings growth even in the toughest periods.
“While holdings can and do decline at times, when they do it’s usually due to a falling price, rather than due to declining earnings or the combination of falling prices and earnings. Mathematically, strong earnings growth provides ballast on both an absolute basis and relative to the broader market. Stated plainly, we believe that what one owns is key and concentrating in the right businesses is a big advantage,” he says.
2. Investors can avoid certain kind of businesses. Ficklin says investors should stay clear of leveraged or commoditized businesses, and also avoid businesses that come with additional currency, country or policy risks.
“Overall, we have very little exposure to the types of businesses that typically see the most downside during turbulence,” he says.
Stick to the right investment principles
Ficklin says just as sticking to the right personal principles can keep one from trouble and lead to a high-quality life, investors, if they adhere to each of the investment guardrails, can lead them to high-quality investment outcomes.
“It may not be obvious how a simple set of principles will make a difference at any point in time, but we expect the difference to reveal itself over time if such principles are consistently executed. The overall success of our strategy over the past thirty years only serves to reinforce our discipline,” he says.
Ficklin says investors should take a business owner’s approach to investing and typically expect to hold the investments in companies for many years.
Hence, if investors concentrate only on the highest-quality growth businesses which can deliver robust underlying earnings growth, they can protect their capital even in a very challenging market.
(Disclaimer: This article is based on Damon Ficklin’s various interviews and speeches )
NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.
Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.
“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”
Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.
Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.
Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.
Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.
In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.
The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.
And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
